Fitch Cuts Sears Holdings (SHLD) to CCC; Outlook Negative
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Fitch Ratings has downgraded its long-term Issuer Default Ratings (IDR) on Sears Holdings Corporation (Nasdaq: SHLD) and its various subsidiary entities to 'CCC' from 'B'. The ratings on various tranches of debt have also been downgraded by a notch. The Rating Outlook is Negative. A full rating list is shown below.
The downgrades reflect the continued deterioration in EBITDA on worse than expected top-line growth, with both Kmart and Sears running negative mid-single-digit comps in the fourth quarter. EBITDA for 2011 is expected to be below $400 million versus $1.5 billion in 2010, based on Sears' update provided through Dec. 25, 2011. As a result, credit metrics continue to be pressured and leverage is expected to be 8.0 times (x) or more in 2011, up from 4.6x in 2010, versus Fitch's prior expectation of leverage increasing to the 6.0x-7.0x range.
In addition, there is increasing risk that EBITDA could turn negative in 2012 with top-line contraction in the mid-single-digit range (due to comparable store sales decline and store closings) even if gross margin remains flat with 2011 levels. As a result, Sears will need to fund operations with increased borrowings.
Liquidity is expected to remain adequate to fund 2012 working capital needs given current availability under the company's U.S. and Canadian facilities.
However, Sears may need to access external sources of financing to fund operations in 2013 and beyond, as the magnitude of the decline in profitability and lack of visibility to turn operations around remain a major concern. If Sears is unable to access the capital markets or find other adequate sources of availability, and EBITDA remains at the current rate or lower, there is a heightened risk of restructuring over the next 24 months.
Fitch estimates that Sears would require a minimum of $400 million-$500 million in cash to run the business and approximately $1.5 billion to $1.7 billion to fund peak seasonal working capital needs during the 2012 holiday season (assuming lower inventory levels versus 2011 as a result of store closings and tighter inventory buys based on the company's recent announcements). As a result, real 'excess' liquidity adjusted for peak seasonal working capital needs would be in the range of $900 million to $1.5 billion. This does not take into account further shortfall in EBITDA and assumes Sears has full access to both its domestic and Canadian credit facilities.
The downgrades reflect the continued deterioration in EBITDA on worse than expected top-line growth, with both Kmart and Sears running negative mid-single-digit comps in the fourth quarter. EBITDA for 2011 is expected to be below $400 million versus $1.5 billion in 2010, based on Sears' update provided through Dec. 25, 2011. As a result, credit metrics continue to be pressured and leverage is expected to be 8.0 times (x) or more in 2011, up from 4.6x in 2010, versus Fitch's prior expectation of leverage increasing to the 6.0x-7.0x range.
In addition, there is increasing risk that EBITDA could turn negative in 2012 with top-line contraction in the mid-single-digit range (due to comparable store sales decline and store closings) even if gross margin remains flat with 2011 levels. As a result, Sears will need to fund operations with increased borrowings.
Liquidity is expected to remain adequate to fund 2012 working capital needs given current availability under the company's U.S. and Canadian facilities.
However, Sears may need to access external sources of financing to fund operations in 2013 and beyond, as the magnitude of the decline in profitability and lack of visibility to turn operations around remain a major concern. If Sears is unable to access the capital markets or find other adequate sources of availability, and EBITDA remains at the current rate or lower, there is a heightened risk of restructuring over the next 24 months.
Fitch estimates that Sears would require a minimum of $400 million-$500 million in cash to run the business and approximately $1.5 billion to $1.7 billion to fund peak seasonal working capital needs during the 2012 holiday season (assuming lower inventory levels versus 2011 as a result of store closings and tighter inventory buys based on the company's recent announcements). As a result, real 'excess' liquidity adjusted for peak seasonal working capital needs would be in the range of $900 million to $1.5 billion. This does not take into account further shortfall in EBITDA and assumes Sears has full access to both its domestic and Canadian credit facilities.
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